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Should You Sell Your House Or Rent It Out?

The Coronavirus has impacted not only individual health but also the health of the U.S. economy. Businesses have closed, some temporarily, others permanently. Employees have left the office, opting for at-home work that’s flexible, but that can be frustrating at the same time. The stock market has seen its share of ups and downs with a level of unpredictability that’s definitely unnerving.

On top of all that, housing prices have risen sharply while home mortgage interest rates have fallen steadily. Homeowners are forced to look anew at an age-old question: is it best to sell a house, or to rent it out? These eight questions can help you determine whether you want to put your home on the market, or put a tenant into your primary residence.

Photo: Creative Commons/ Images_of_Money

What Did You Pay For Your Home?

Purchase price often takes precedence when it comes to determining whether the time is right to sell your home. If you purchased your house for $300k and it’s now worth only $250k, clearly it’s not the best time to put your home on the market. But if the current value exceeds the current assessed value, you might want to sell your home instead of renting it out, and possibly reap a cash windfall.

Photo: Creative Commons/NEC Corporation of America

What Is Your Home Worth?

Determining the value of a home means taking into consideration many factors, including lot size, square footage, year it was built, location, recent improvements, and more. Ask a real estate agent to conduct a comparative market analysis (CMA), or turn to Zillow or Trulia to get a sense of the selling price of neighborhood properties similar to yours.

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Can You Afford Your Current Mortgage Payments?

An economy in flux can impact your personal finances and whether or not you can continue managing your monthly mortgage payments. To help assess your home ownership financial situation, ask yourself the following questions:  How much equity do you have in the property? Does it make sense to refinance?

If you decide to keep the house and rent it out, can you afford to buy or rent someplace else? Do you have enough savings to cover at least six mortgage payments in case the rental property is vacant for a few months, or you find yourself in a situation where a tenant needs to be evicted?

Photo: Creative Commons/danielmoyle

Is It A Seller’s Market?

It goes without saying that the best time to sell your home is when the real estate market favors sellers. Simply put, if a housing market has only a very limited number of homes for sale, but a high volume of buyers, you can assume it might be a good time to sell your home and reap the maximum profit.

If you’re putting up your ‘For Sale’ sign during a buyer’s market, you might lose money. Take a look at the Days on Market (DOM) metric to get a sense of how long it’s taking for similar homes to sell.

Photo: Creative Commons/401(K) 2013

Are You Taking Into Account The Taxes You’ll Pay After Selling Your Home?

The law on capital gains tax is clear-cut:  If a house has been your primary residence for two of the last five years, IRS laws stipulate that you can exclude up to $250,000 (single) or up to $500,000 (married) in profit on capital gains tax. But if you rent your home for at least three years, it will no longer be considered your primary residence, and any profit you make when you sell the property will be subject to a capital gains tax.

Photo: Creative Commons/401(K) 2013

Do You Have A Down Payment Set Aside For Your Next Home?

Renting sounds good to you, especially when you start calculating the monthly income you’ll be getting from letting someone else call your place Home Sweet Home. But if you don’t have enough money on hand to cover a down payment on your next house, you might want to put off renting out your current home. Another option: you could rent a house and use the rental income you’ll be collecting from your previous residence to cover that monthly bill.

Photo: Creative Commons/Charleston’s TheDigitel

Are Rents Rising In Your Area And How Much Rent Can You Charge For Your House?

In times when the real estate market is down, renting out your house instead of selling it might be the better choice. On real estate sites such as Trulia and Zillow, you can find out about average rents for a wide variety of properties in your area. Factors that can influence increases and decreases in rent include sizable housing inventory, or high demand for affordable rentals.

A free rent estimator tool such as Rentometer.com can help you determine a rent rate that works for you. Also, keep in mind that rental income is subject to rental income taxes; you’ll be taxed at your ordinary tax rate, but there are certain expenses you can write off.

If you decide to rent out your house, plan to have at least six months of rent reserves at your disposal to cover monthly costs if finding a good tenant takes longer than you anticipated, or if you find yourself looking to evict a tenant for nonpayment of rent. Be sure to check out your area’s eviction laws, as they can vary depending on location.

Photo: Flickr/ninachildish

Will You Be The Landlord?

Sure, collecting rental income can seem easy and effortless — almost like money for nothing. But becoming a landlord comes with its own set of responsibilities, such as having an understanding of Fair Housing Laws; calculating rental property expenses, including repairs; and factoring in additional costs like HOAs, insurance, and taxes. Of  course, you could offload the landlord responsibilities to a property manager, but that, too, comes at a cost:  Property managers generally charge between 8-10% of collected rents.

There’s no right answer to the ‘sell vs rent’ question, but as long as you can accurately assess your current situation and needs, making the right decision becomes fairly clear.